Two Sagging Economies… Two Laid-Back Banks

Anemic. Stagnant. Plodding.

Pick your favorite… it doesn’t matter. They all describe the state of the British and Eurozone economies.

Two weeks before the official third quarter U.K. GDP figure is released, the National Institute of Economic and Social Research (NIESR) delivered a somber verdict. The group says it actually didn’t grow at all, confounding those who said the economy started growing again.

Cue a fresh round of some good, old-fashioned British grumbling.

The culprit: a 2.5% fall in industrial production in August, as oil demand dropped. Still, neutral is better than reverse - a gear that Britain had driven in for 2009 up to that point, posting a 2.4% first-quarter slump and 0.6% second-quarter decline.

It’s not alone either. Its European neighbors are also backpedaling. The latest quarterly figure from Eurostat shows that the 16-nation region posted a 0.2% contraction - its fifth straight quarterly decline.

On the bright side, however, that second quarter performance was a vast improvement on the 2.5% slump during the first three months of 2009, as the figures showed power hitters, Germany and France, returning to positive growth, while Portugal, Greece, the Czech Republic, and Poland have also come out of recession.

The European Central Bank’s (ECB) response?

Notoriously inflation-conscious members of the ECB certainly aren’t about to rock the boat by touching interest rates anytime soon.

The bankers left the base rate at 1% (the lowest in its 10-year history), with President Jean-Claude Trichet arguing that although the region appears to be “stabilizing… uncertainty remains high.”

Hopelessly Out of Touch

In response to the NIESR figures in Britain, Liam Byrne, Chief Secretary to the Treasury, demonstrated exactly why many people across the world love to ridicule their elected officials, with the nonsensical belief that the biggest risk to an economic recovery was complacency.

Really? How about despondency instead? When you’ve got an economy on its knees and people losing their jobs, I hardly think that’s grounds for complacency.

The Bank of England (BoE) certainly isn’t complacent. At its latest monetary policy meeting, the nine-member panel not only kept interest rates at 0.5% for the seventh straight month, it also said it will complete its unprecedented £175 billion ($278.3 billion) cash injection into the economy (by buying commercial paper) in November.

The question now is what the BoE will do when this happens. Analysts are looking for the bank to issue some guidelines about how it plans to scale back this “quantitative easing,” given that if it wants to increase the £175 billion limit, the Treasury will have to authorize it first.

This comes amid fears that show the program hasn’t had the desired effect in spreading much additional stimulus into the economy, but rather that banks and other financial institutions are simply stashing the money away.

Reminds me of a certain famous line from Gordon Gekko in the movie, “Wall Street”: Greed is good.

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